MB0051-Unit-04-Contracts of Bailment and PledgeUnit-04-Contracts of Bailment and PledgeStructure:4.1 Introduction

Objectives

4.2 Bailment and its Kinds

Definition of bailment (Sec.148)

Kinds of bailments

4.3 Duties and Rights of Bailor and Bailee

Duties of a bailor

Duties of a bailee

Rights of a bailee

Rights of a bailor

4.4 Termination of Bailment

4.5 Finder of Lost Goods

4.6 Pledge or Pawn

4.7 Pledge by Non-owners

4.8 Rights and Duties of Pledgor and a Pledgee

Duties of a pledgee

Duties of a pledgor

Rights of a pledgor

4.9 Summary

4.10 Terminal Questions

4.11 Answers

4.1 Introduction

In the previous unit, you came to know about the contract of law and guarantee of contract. In this unit you will study about the contract of bailment.

At one time or another, you enter into a legal relationships, called bailment and pledge. Bailments are quite common in business also. Traders often store their surplus goods in warehouses; and utilize the services of cold storages for keeping their goods to be taken back as and when required; and factory owners often send machinery back to vendors for repairs. Also, goods are pledged for securing loans.

ObjectivesAfter studying this unit, you should be able to:

· Describe the bailment and its types

· Explain the duties and rights of bailor

· Define pledge

· Explain the pledge by non-owner

4.2 Bailment and its Kinds

4.2.1 Definition of bailment (Sec.148)Bailment is defined as the “delivery of goods by one to another person for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of person delivering them”. The person delivering the goods is called the ‘bailor’ and the person to whom the goods are delivered is called the ‘bailee’. The explanation to the above Section points out that delivery of possession is not necessary, where one person, already in possession of goods contracts to hold them as bailee.

The bailee is under an obligation to re-deliver the goods, in their original or altered form, as soon as the time of use for, or condition on which they were bailed, has elapsed or been performed”. Let’s illustrate, (i) A delivers some clothes to B, a dry cleaner, for dry cleaning. (ii) A delivers a wrist watch to B for repairs. (iii) A lends his book to B for reading. (iv) A delivers a suit-length to a tailor for stitching. (v) A delivers some gold biscuits to B, a jeweller, for making jewellery. (vi) Delivery of goods to a carrier for the purpose of carrying them from one place to another. (vii) Delivery of goods as security for the repayment of loan and interest thereon, i.e., pledge.

From the definition of bailment, the following characteristics should be noted:

1. Delivery of goods. The essence of bailment is delivery of goods by one person to another for some temporary purpose. Delivery of goods may, however, be actual or constructive. Actual delivery may be made by handing over goods to the bailee. Constructive delivery may be made by doing something which has the effect of putting the goods in the possession of the intended bailee or any person authorised to hold them on his behalf (Sec.149).

Example: A holding goods on behalf of B, agrees to hold them on behalf of C, there is a constructive transfer of possession from C to A.

2. Bailment is based on a contract. In bailment, the delivery of goods is upon a contract that when the purpose is accomplished, they shall be returned to the

bailor. For example, where a watch is delivered to a watch repairer for repair, it is agreed that it will be returned, after repair, on the receipt of the agreed or reasonable charges.

3. Return of goods in specie. The goods are delivered for some purpose and it is agreed that the specific goods shall be returned. Return of specific goods (in specie) is an essential characteristic of bailment. Thus, where an equivalent and not the same is agreed to be returned, there is no bailment.

4. Ownership of goods. In a bailment, it is only the possession of goods which is transferred and not the ownership thereof, therefore the person delivering the possession of goods need not be the owner; his business is to transfer possession and not ownership.

4.2.2 Kinds of bailmentsBailments may be, classified into six kinds as follows. (i) Deposit. Delivery of goods by one person to another for the use of the former, i.e., bailor; (ii) Commodatum. Goods lent to a friend gratis to be used by him; (iii) Hire. Goods lent to the bailee for hire, i.e., in return for payment of money; (iv) Pawn or Pledge. Deposit of goods with another by way of security for money borrowed; (v) Delivery of goods for being transported, or something to be done about them, by the bailee for reward. (vi) Delivery of goods as in (v) above, but without reward.

Self Assessment Questions

1. Delivery of good is essential for effecting bailment. (True/False)

2. Placing of ornaments in a bank locker is not a contact of bailment. (True/False)

3. All are the kind of bailments. EXCEPT:

(a) Commodatum

(b) Hire

(c) Deposit

(d) Loan

4.3 Duties and Rights of Bailor and Bailee4.3.1 Duties of a bailor1. To disclose know faults in the goods (Sec.150). The bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware and which materially interfere with the use of them or expose the bailee to extraordinary risks. If he does not make such disclosure, he is responsible for the damage arising to the bailee directly from such faults.

Example: A lends a horse, which he knows to be vicious, to B. He does not disclose the fact that the horse is vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage sustained.

2. Liability for breach of warranty as to title. The bailor is responsible to the bailee for any loss which the bailee may sustain by reason that the bailor was not entitled to make the bailment, or to receive back the goods or to give directions respecting them (Sec.164).

Example: A gives B’s car to C without B’s knowledge and permission. B sues C and receives compensation. A, the bailor, is responsible to make good this loss to C, the bailee.

3. To bear expenses in case of gratuitous bailments. Regarding bailments under which bailee is to receive no remuneration, Sec.158 provides that in the absence of a contract to the contrary, the bailor must repay to the bailee all necessary expenses incurred by him for the purpose of the bailment.

4. In case of non-gratuitous bailments, the bailor is held responsible to bear only extraordinary expenses.

Example: A car is lent for a journey. The ordinary expenses like petrol, etc., shall be borne by the bailee but in case the car goes out of order, the money spent in its repair will be regarded as an extraordinary expenditure and borne by the bailor.4.3.2 Duties of a bailee1. To take care of the goods bailed (Sec.151). In all cases of bailment, the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed.

In case, bailee has taken the amount of care as described above, he shall not be responsible, in the absence of any special contract, for the loss, destruction or deterioration of the thing bailed (Sec.152).

Example: A lends a car to B for his own driving only. B allows C, his wife, to drive the car. C drives with care, but the car is damaged in an accident. A is liable to make compensation to B for the damage done to the car.

2. Not to make unauhorised use of goods (Sec.154). In case the bailee makes unauthorised use of goods, i.e., uses them in a way not warranted by the terms of bailment, he is liable to make compensation to the bailor for any damages arising to the goods from or during such use of them.

3. Not to mix bailor’s goods with his own (Secs.155-157). If the bailee without the consent of the bailor, mixes the goods of the bailor with his own goods and the goods can be separated or divided, the bailee shall be bound to bear the expense of separation or division and any damages arising from the mixture.

Example: A bails 100 bales of cotton marked with a particular mark to B. B, without A’s consent, mixes the 100 bales with other bales of his own bearing a different mark. A is entitled to have his 100 bales returned and B is bound to bear all expenses incurred in the separation of the bales and any other incidental damage.

But in case goods are mixed in such a manner that it is impossible to separate the goods bailed from the other goods and deliver them back, the bailor is entitled to be compensated by the bailee for the loss of the goods.

4. To return the goods bailed without demand (Sec.160). It is the duty of the bailee to return, or deliver according to the bailor’s directions, the goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose, for which they were bailed has been accomplished.

If bailee fails to return the goods at the proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time (Sec.161).

5. To return any accretion to the goods bailed (Sec.163). In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any increase or profit which may have accrued from the goods bailed.

Example: A leaves a cow in the custody of B to be taken care of. The cow gives birth to a calf. B is bound to deliver the cow as well as the calf to A.

4.3.3 Rights of a bailee1. The duties of the bailor are, in fact, if looked from the point of view of bailee, the bailee’s rights. Thus, a bailee can sue bailor for (a) claiming compensation for damages resulting from non-disclosure of faults in the goods; (b) for breach of warranty as to the title and the damage resulting there from; and (c) for extraordinary expenses. Thus in the case of wrongful deprivation the bailee has a right to use the same remedies which the owner might have used in the like case.

2. Another right of bailee is the right of lien (Secs.170-171). Lien is a right in one person to retain that which is in his possession, belonging to another, until some debt or claim is paid, Lien, thus presupposes two things: (i) The person vested with the right of lien is in possession of the goods or securities in the ordinary course of business. (ii) The owner (bailor in this case) has a lawful debt due or obligation to discharge to the person in possession of the said goods or securities (bailee in this case). Since, lien is available only until the debt or claim is satisfied, once the debt is satisfied or obligation discharged, the right of lien is extinguished. The property so retained has, then, to be returned to or kept at the disposal of the owner (i.e., bailor). Lien may be of two types: (i) General Lien and (ii) Particular Lien.

General Lien means the right to retain goods not only for demands arising out of the goods retained but for a general balance of account in favour of certain persons. Particular Lien, on the other hand, means the right to retain the particular goods in respect of which the claim is due. Bailee’s right of lien is particular in certain cases whereas general in other cases. Particular Lien is conferred upon a bailee by virtue of the provisions of Sec.170. It reads: “Where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the service he has rendered in respect of them”.

The provisions of Sec.171 empower certain categories of bailees to exercise a general lien. These include: bankers, factors, wharfingers, attorneys of High Court and policy brokers. These bailees can retain all goods of the bailor so long as anything is due to them, unless there is a contract to the contrary.

3. Right against wrongful deprivation of or injury to goods (Secs. 180-181). If a third person wrongfully deprives the bailee of the use or possession of the goods bailed, or causes them any injury, the bailee is entitled to use such remedies as the owner might have used in the like case if no bailment had been made and either the bailor or the bailee may bring a suit against the third person for such deprivation or injury. Now, whatever is obtained by way of relief or compensation in such a suit shall, as between the bailor and the bailee, be dealt with according to their respective interest (Sec.181).

4.3.4 Rights of a bailor1. The bailor can enforce, by suit, all duties or liabilities of the bailee.

2. In case of gratuitous bailment (i.e., bailment without reward), the bailor can demand their return whenever he pleases, even though he lent it for a specified time or purpose. But if, on the faith of such bailment, the borrower has acted in such a manner that the return of the thing before the specified time would cause him (i.e., the bailee) loss exceeding the benefit derived by him from the bailment, the bailor must indemnify the borrower for the loss if he compels an immediate return (Sec.159).

Self Assessment Questions

4. Bailee need not return to the bailor any accretion to the goods on completion of the contract of bailment. (True/False)

5. A bailee has a general lien on the goods bailed. (True/False)

4.4 Termination of Bailment

A contract of bailment terminates or comes to an end under the following circumstances:

1. On the expiry of the stipulated period. Where bailment is for a specific period, it comes to an end on the expiry of the specified period.

Example: A room cooler is hired by X from Y for a period of 6 months. On the expiry of 6 months X must return the cooler.

2. On the accomplishment of the specified purpose. In case, bailment is for specific purpose it terminates as soon as the purpose is accomplished.

3. By bailee’s act inconsistent with conditions of bailment. If the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the bailment, the bailor may terminate the bailment (Sec.153).

Example: A lets to B for hire, a horse for his own riding. B drives the horse in his carriage. A shall have the option to terminate the bailment.

4. A gratuitous bailment may be terminated at any time (Sec.159). However, if premature termination causes any loss to the bailee exceeding the benefit derived from the bailment, the bailor must indemnify. Further, a gratuitous bailment terminates by the death of either the bailor or the bailee (Sec.162).

Self Assessment Question

6. A gratuitous bailment can be terminated by the bailor even before the stated time. (True/False)

4.5 Finder of Lost Goods

Finding is not owning. A finder of lost goods is treated as the bailee of the goods found as such and is charged with the responsibilities of a bailee, besides the responsibility of exercising reasonable efforts in finding the real owner. However, he enjoys certain rights also. His rights are summed up hereunder.

1. Right to retain the goods (Sec.168). A finder of lost goods may retain the goods until he receives the compensation for money spent in preserving the goods and/or amount spent in finding the true owner. A finder, however, cannot sue for such compensation. But where, a specific reward has been offered by the owner for the return of the goods lost, the finder may sue for such reward and may retain the goods until he receives it.

2. Right to sell (Sec.169). When a thing which is commonly the subject of sale is lost, if the owner cannot with reasonable diligence be found or if he refuses, upon demand, to pay the lawful charges of the finder, the finder may sell it. (i) when the thing is in danger of perishing or of losing the greater part of its value; (ii) when the lawful charges of the finder in respect of the thing found, amount to two-third of its value.

Self Assessment Questions

7. A finder may sell goods when they are in danger of perishing or losing the greater part of their value. (True/False)

8. A person who delivers the goods as security is known as:

(a) Pledgee

(b) Pledgor

(c) Bailor

(d) None

4.6 Pledge or Pawn

Sec.172, defines a pledge as the bailment of goods as security for payment of a debt or performance of a promise. The person, who delivers the goods as security, is called the ‘pledgor’ and the person to whom the goods are so delivered is called the ‘pledgee’. The ownership remains with the pledgor. It is only a qualified property that passes to the pledgee. He acquires a special property, and lien which is not of ordinary nature and so long as his loan is not repaid, no other creditor or ‘authority’ can take away the goods or its price. Thus, in Bank of Bihar v. State of Bihar and Ors. (1971) Company Cases 591, where sugar pledged with the Bank was seized by the Government of Bihar, the Court ordered the State Government of Bihar to reimburse the bank for such amount as the Bank in the ordinary course would have realised by the sale of sugar seized.

Delivery essential. A pledge is created only when the goods are delivered by the borrower to the lender or to someone on his behalf with the intention of their being treated as security against the advance. Delivery of goods may, however, be actual or constructive. It is constructive delivery where the key of a godown (in which the goods are kept) or documents of title to the goods are delivered. The owner of the goods can create a valid pledge by transferring to the creditor the documents of title relating to the goods.

Example: A businessman pledged a railway receipt to a bank, duly endorsed. Later he was declared bankrupt. The Official Assignee contended that the pledge of the railway receipt was not valid. Held, that the railway receipts in India are title to goods, and that the pledge of the railway receipt to the bank, duly endorsed, constituted a valid pledge of the goods.

Similarly, where the goods continue to remain in the borrower’s possession but are agreed to be held as a ‘bailee’ on behalf of the pledgee and subject to the pledgee’s order, it amounts to constructive delivery, and is a valid pledge.

Advantages of pledge. To a creditor, pledge is perhaps the most satisfactory mode of creating a charge on goods. It offers the following advantages:

1. The goods are in the possession of the creditor and therefore, in case the borrower makes a default in payment, they can be disposed of after a reasonable notice.

2. Stocks cannot be manipulated as they are under the lender’s possession and control.

3. In the case of insolvency of the borrower, lender can sell the goods and prove for the balance of the debt, if any.

4. There is hardly any possibility of the same goods being charged with some other party if actual possession of the goods is taken by the lender.

Activity 2:

The finder of lost goods has no right to file a suit for recovery of expenses incurred by him for finding out the true owner. Provide your view on this.

Self Assessment Questions9. The ownership of the goods bailed passes to the bailee. (True/False)

10. Right to sell comes under which section.

(a) Sec.168

(b) Sec.167

(c) Sec.169

(d) Sec.170

4.7 Pledge by Non-owners

The general rule is that it is the owner of the goods who can ordinarily create a valid pledge. However, in the following cases, even a pledge by non-owners shall be valid:

1. Pledge by a mercantile agent. Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorised by the owner of the goods to make the same. Such a pledge shall, however, be valid only if the pawnee acts in good faith and has not at the time of the pledge notice that the pawnor has no authority to pledge (Sec.178).

A ‘mercantile agent’ as per Sec.2(9) of the Sale of Goods Act, 1930, means a mercantile agent having, in the customary course of business as such agent, authority either to sell goods or to consign goods for the purpose of sale or to buy goods or to raise money on the security of goods. For a pledge by a mercantile agent to be valid the following conditions must be satisfied:

a) Good faith. The pledgee must have acted in good faith and must not have at the time of the pledge notice that the pawnor had no authority to pledge the goods. The onus of proving both these facts rests upon the person disputing the validity of the pledge.

b) Acting in the ordinary course of business. The mercantile agent must have acted in the ordinary course of his business. Therefore, if he does the business outside his business premises or out of business hours, such a transaction would fall outside this section.

2. Pledge by seller or buyer in possession after sale. Under Sec.30 of the Sale of Goods Act, a seller left in possession of goods after sale, and a buyer, who obtains possession of goods with the consent of the seller, before sale, can create a valid pledge. Once again, for the pledge to be valid the pledgee should have acted in good faith and without notice of previous sale of goods to the buyer or of the lien of the seller over the goods.

3. Pledge by a person in possession under a voidable contract (Sec.178-A). Where a person obtains possession of goods under a voidable contract the pledge created by him is valid provided:

a) the contract has not been rescinded before the contract of pledge and

b) the pawnee act is good faith and without notice of the pawnor’s defect of title.

4. Pledge by co-owner in possession. One of several joint owners of goods in sole possession thereof with the consent of the rest may make a valid pledge of the goods.

5. Pledge by a person having limited interest (Sec.179). Where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of the interest. Thus, a pledgee may further pledge goods to the extent of the amount advanced thereon.

Self Assessment Questions

11. A pledge by a mercantile agent to be valid if he must be in good faith and ________________.

12. A mercantile agent comes under _______________.

4.8 Rights and Duties of Pledgor and a PledgeeAccording to Sec.176 in case the pledgor fails to pay his debt or complete the performance of obligation at the stipulated time, the pledgee can exercise any of the following right: (i) bring a suit against the pledgor upon the default in redemption of the debt or performance of promise and retain possession of goods pledged as a collateral security; or (ii) sell the goods pledged on giving the pledgor a reasonable notice of sale.

In case the goods pledged when sold do not fully meet the amount of the debt, the pledgee can proceed for the balance. If, on the other hand, there is any surplus, that has to be accounted for to the pledgor. Before sale can be executed, a reasonable notice must be given to the pledgor so that: (a) the pledgor may meet his obligation as a last chance; (b) he can supervise the sale to see that it fetches the right price.

However, the sale made by the pledgee without giving a reasonable notice to the pledgor is not void, i.e., cannot be set aside. The pledgee will be liable to the pledgor for the damages.

In addition to the rights mentioned in Sec.176, a pledgee has the following rights:

1. It is the duty of the pledgor to disclose any defects or faults in the goods pledged which are within his knowledge. Similarly, if the goods are of an abnormal character says, explosives or fragile, the pledgee must be informed. In case the pledgor fails to inform such faults or abnormal character of the goods pledged, any damage as a result of non-disclosure shall have to be compensated by the pledgor.

2. The pledgee has a right to claim any damages suffered because of the defective title of the pledgor.

3. A pledgee’s rights are not limited to his interests in the pledged goods. In case of injury to the goods or their deprivation by a third party, he would have all such remedies that the owner of the goods would have against them. In Morvi Mercantile Bank Ltd v. Union of India, the Supreme Court held that the bank (pledgee) was entitled to recover not only Rs 20,000 – the amount due to it, but the full value of the consignment, i.e., Rs 35,000. However, the amount over and above his interest is to be held by him in trust for the pledgor.

4. Pawnee’s right of retainer [Sec.173]. The pawnee may retain the goods pledged, not only for payment of the debt or the performance of the promise, but for the interest of the debt and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. However, Sec.174 provides that the pawnee shall not, in the absence of a contract to that effect, retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged; but such contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the pawnee.

5. A pledgee has a right to recover any extraordinary expenditure incurred for the preservation of the goods pledged (Sec.175).

4.8.1 Duties of a pledgee1. The pledgee is required to take as much care of the goods pledged to him as a person of ordinary prudence would, under similar circumstances, take of his own goods, of a similar nature.

2. The pledgee must not put the goods to an unauthorised use.

3. The pledgee is bound to return the goods on payment of the debt.

4. Any accruals to the goods pledged belong to the pledgor and should be delivered accordingly. Thus, if the security consists of equity shares and the company issues bonus shares to the equity shareholders, the bonus shares are the property of the pledgor and not the pledgee.

4.8.2 Duties of a pledgor1. He must disclose to the pledgee any material faults or extraordinary risks in the goods to which the pledgee may be exposed.

2. He is responsible to meet any extraordinary expenditure incurred by the pledgee for the preservation of the goods.

3. Where the pledgee has exercised his right of sale of goods, any shortfall has to be made good by the pledgor.

4. He is liable for any loss caused to the pledgee because of defects in his (pledgor’s) title to the goods.

4.8.3 Rights of a pledgor

1. The pledgor has a right to claim back the security pledged on repayment of the debt with interest and other charges.

2. He has a right to receive a reasonable notice in case the pledgee intends to sell the goods, and in case he does not receive the notice he has a right to claim any damages that may result.

3. In case of sale, the pledgor is entitled to receive from the pledgee any surplus that may remain with him after the debt is completely paid off.

4. The pledgor has a right to claim any accruals to the goods pledged.

5. If any loss is caused to the goods because of mishandling or negligence on the part of the pledgee, the pledgor has a right to claim the same.

Self Assessment Questions13. The pledgee has a right to claim any damages suffered because of the defective title of the pledgor. (True/False)

14. The pledgee is bound to return the goods on payment of the debt. (True/False)

4.9 Summary

The bailee is under an obligation to re-deliver the goods, in their original altered form, as soon as the time of use for, or condition on which they were bailed, has elapsed or been performed. Bailment is usually based on a contract. If the goods are bailed or hire or reward, the bailor is responsible for the damage arising to the bailee directly from such faults.

GlossaryBailment: A bailment is the delivery of goods by one person to another for some purpose upon a contract that they shall when the purpose is accomplished, be returned or otherwise disposed of according to the direction of the person delivering them.

Pledge: The bailment of goods as security for payment of a debt or performance of a promise is called pledge.

Bailor: The person delivering the goods is called the bailor.

Bailee: The person to whom the goods are delivered is called the bailee.

4.10 Terminal Questions

1. What do you mean by bailment? What are the requisites of a contract of bailment? Explain.

2. Describe the characteristics of pledge.

3. When a pledger fails to redeem his pledge, what rights does the pledge have in the pledge?

4. What are the respective rights and duties of a pawnor and a pawnee?

5. “Bailor is liable to the bailee for loss caused by faults in the goods bailed whether the bailor was aware of the same or not”. Comment.

6. Distinguish between ‘gratuitous bailment’ and ‘bailment for hire’.

4.11 Answers

Answers to Self Assessment Questions1. True

2. True

3. (d)

4. False

5. False

6. True

7. True

8. (b)

9. False

10. (a)

11. Acting in the ordinary course of business

12. Sec.2(9) of Sales of Goods Act, 1930

13. True

14. True

Answers to Terminal Questions1. Refer 4.2 – Bailment is defined as the “delivery of goods by one to another person for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of person delivering them”.

2. Refer 4.6 – The person, who delivers the goods as security, is called the ‘pledgor’ and the person to whom the goods are so delivered is called the ‘pledgee’.

3. Refer 4.6 – To a creditor, pledge is perhaps the most satisfactory mode of creating a charge on goods. It offers the following advantages.

4. Refer 4.8 – According to Sec.176 in case the pledgor fails to pay his debt or complete the performance of obligation at the stipulated time.

5. Refer 4.3 – The bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware and which materially interfere with the use of them or expose the bailee to extraordinary risks.

6. Refer 4.3 – Candidate give answer by their experience through the study of this unit.

Mini-caseIt would have been business as usual at multinational drug-maker Pfizer’s annual shareholder meeting, but for a dissenting LIC representative who opposed two enabling proposals to increase the salary of the managing director and the commission of two Indian non-executive directors, respectively.

LIC totally holds 14.38 per cent in Pfizer, and the LIC representative told that he was communicating the decision taken by the corporation. He was, however, unable to give reasons behind the decision. Market observers indicated that LIC could push for a poll on the proposal, given its equity holding.

One of the enabling resolutions was regarding Pfizer’s Managing Director in India, Mr. Kewal Handa’s salary, proposing that it be increased from its 2007-level of Rs 1.80 crore to a maximum of Rs 2.50 crore a year.

The other enabling resolution was with reference to resident non-executive directors Mr. R.A. Shah and Mr. Pradip Shah, seeking to raise their commission, at the rate of one per cent of the company’s profit, up to Rs 50 lakh a year.

The company explained that the commission for non-executive directors was upped to Rs 20 lakh a year in 2004, effective for a five-year period starting December 2003.

Shareholders should be part of the good and bad times of the company, said a shareholder who has been holding a Pfizer share since the beginning, when the multinational sent letters to shareholders inviting them into their fold.

He, along with some other shareholders, were expressing their unhappiness over the dividend. The dividend for the year ended 2008 was Rs 12.50 per share, as compared with the previous year’s Rs 27.50 per share. However, Pfizer’s Chairman, Mr. R.A. Shah, clarified that there were no motives behind the company’s actions and dividends were generous when the circumstances warranted it.

On Pfizer Inc’s recently announced plan to raise stake in its Indian subsidiary to 75 per cent, from the present 41 per cent, he said, that there was no intention to delist, "at this time".

Unlike info-tech companies, he said, the applicable milestone for Pfizer for reverse book building was 75 per cent. Creeping acquisition and buy-back was allowed only till 75 per cent, he clarified. Also, he said, Pfizer was also evaluating the possibility of merging Duchem (that has pharma and animal health businesses) with itself.

Detailing Pfizer’s plans to expand its domestic reach, Mr. Handa said that they would increase the product portfolio and value offerings from the company. The company was planning to increase its field force by 300 people, including 100 for just retail sales.

Question

Discuss LIC’s role in Pfizer. (Hint: Summarize the LIC responsibilities in Pfizer.)

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